Navigating GASB 101 - What You Need to Know About Compensated Absences

As we approach the implementation deadline for GASB 101, I'm here to help you understand what this standard means for your government's financial reporting. This update to the 1992-era Statement 16 brings compensated absences accounting into the modern era, addressing newer benefits like PTO that weren't common three decades ago.

Why Did GASB Issue This Standard?

GASB's motivation can be summed up in two C's: consistency and comparability. The previous guidance in Statement 16 led to inconsistent interpretations (like whether to include FICA in liability calculations) and didn't address newer leave types like PTO.

This standard aligns with GASB's broader initiative to record liabilities in the period when they're incurred, not when they're paid out—similar to their approach with leases, pensions, and OPEBs.

When Is It Effective?

GASB 101 is effective for periods beginning after December 15, 2023. For June 30 year-ends, that means your June 30, 2025 financial statements will need to comply. Early implementation was permitted.

What Counts as a Compensated Absence?

The standard clearly defines what qualifies as a compensated absence:

Included:

• Vacation leave
• Sick leave
• PTO
• Parental leave, bereavement leave, military leave, jury duty (require triggering events)
•  

Not included:

• Holidays and unlimited PTO (not based on prior service)
• "Use it or lose it" leave at fiscal year-end
• Termination benefits (covered under GASB 47)

The Big Change: Recognizing Liabilities

The most significant change affects how you handle sick leave. Previously, if your policy didn't pay out sick leave upon termination, you simply didn't record a liability. That's no longer the case.

Under GASB 101, you must record a liability for leave that is:

1. Attributed to services already rendered
2. The leave accumulates
3. More likely than not (50% probability) to be used for time off or otherwise paid/settled

This means you'll need to analyze how much of the earned but unused sick leave your employees are likely to use before termination, even if you don't pay it out when they leave.

This also applies to annual leave, PTO, and the like, where the employer has a cap on the amount of leave paid out upon termination. If the employee has earned the leave, there may be additional liability regardless of the cap.

Calculating the Liability

Here's how to approach the calculation:

1. Determine the rate: Use the current employee pay rate at the financial statement date. If leave is paid out at a different rate (e.g., sick leave at 50% of regular pay), use that rate.
2. Include salary-related payments: Add employer portions of:
   • Social Security and Medicare
   • Defined contribution retirement plans
   • Do NOT include defined benefit portions (already in pension/OPEB liabilities)
3. Evaluate the "more likely than not" threshold: This requires looking at:
   • Your policies
   • Historical usage patterns
   • Whether leave has been earned and is eligible for future use
   • Whether employees typically use or forfeit leave

I recommend looking at 2-5 years of historical data, depending on how consistent the patterns are. This analysis doesn't need to be redone annually if trends remain stable.

Implementation Process

Here are practical steps to get started:

1. Review your policies: Ensure your policies are clear and document how different types of leave are earned and used.
2. Consider your leave year: Does your vacation/sick leave year align with your fiscal year? If not (e.g., calendar year leave with June 30 fiscal year), you'll need to calculate how much leave will be used before it expires.
3. Look at historical patterns: How much leave do employees typically earn versus use?
4. Document your approach: Create a well-thought-out memo explaining your inputs, assumptions, and methodology.
5. Consider materiality: While materiality does apply, for most governments, this liability will be material. I encourage you to talk to your auditor about materiality consideration.
6. Update disclosures: Revise the policy note in your financial report to reflect the new definition of compensated absences.

Note Disclosure Changes

There's good news on the disclosure front: you can now show the net change in compensated absences rather than separately disclosing increases and decreases. Simply use an asterisk to indicate this is a net change.

You also no longer need to disclose which governmental fund is typically used to liquidate compensated absences.

Common Scenarios

Let me walk through some common scenarios:

1. PTO Only: If you offer only PTO that carries over without limit and is paid out upon termination, all of it is recognized as a liability (plus associated FICA and contributions).
2. Vacation Time: If vacation carries over without limit and is paid out upon termination, you recognize the liability for whatever remains at year-end.
3. Sick Leave Scenarios:
   • Scenario 1: Sick leave earned monthly, carries over without limit, not paid upon termination → You must estimate how much is more likely than not to be used.
   • Scenario 2: Sick leave earned monthly, does not carry over at fiscal year-end, not paid upon termination → No liability (it won't be used if it doesn't carry over).
   • Scenario 3: Sick leave earned monthly, does not carry over at calendar year-end (with June 30 fiscal year), not paid upon termination → You must calculate how much will likely be used before it expires on December 31.

Final Thoughts

I know this standard involves some judgment calls and estimates, especially for sick leave that may not been included in your liability previously. Work with your auditors during preliminary fieldwork to discuss your calculation approach.

Remember that GASB 100 (implementation guidance) applies here, so you'll need to disclose the nature of the change and whether you made a prior period adjustment.

Document everything thoroughly—not just for your auditors, but for future staff who will need to understand your methodology.

While this may seem like a lot of work, once you establish your process, maintaining it in future years should be much more manageable. If you have questions about your specific situation, please don't hesitate to reach out to your engagement team—we're here to help you navigate this change successfully.